Standard & Poor’s raised its corporate credit rating for Level 3 Communications from “CCC” to “CCC+” following the carrier’s recent debt exchange, even though S&P viewed the move as a selective default on Level 3’s debt.

In an exchange completed last week, Level 3 issued $692 million of 11.5% senior notes, due in 2010, in exchange for its existing senior notes due in 2008: $555.8 million in 9.125% senior notes, $54.4 million in 11% senior notes and $81.5 million in 10.5% senior discount notes. In addition, the company retained another $600 million in debt due in 2008.

In its initial response to the debt offering, S&P lowered its credit rating for Level 3 from “CCC” to “SD,” which stands for “selective default,” a rating assigned when a company has failed to pay one of its financial obligations but will continue to meet its other obligations.

“We view completion of the exchange offer as tantamount to a default on the original bond issue terms because of the extension of the debt maturity,” S&P said in a statement issued today.

However, following the completion of the exchange, S&P raised it ratings on all Level 3 notes and raised the company’s overall credit rating to “CCC+ with a stable outlook.” Level 3’s “CCC” rating indicates that it has “very weak security characteristics and is dependent on favorable business conditions to meet financial commitments.” The plus sign indicates Level 3 falls at the top, or most secure, end of that category.

In today’s statement, S&P said the upgrade reflected not only Level 3’s improved capital structure following the debt exchange but potential benefits from industry consolidation.

S&P’s upgrade of Level 3’s credit standing echoes last week’s upgrade of the company’s stock from Merrill Lynch analyst David Janazzo, who changed his recommendation on Level 3 from “sell” to “neutral” in light of the debt exchange.